Central Banks: Interest Rate News & Analysis

China cuts Loan Prime Rates: 1 year to 3.7% (from 3.8%) & 5 year to 4.6% (from 4.65%)

The People's Bank of China cut its Medium-Term Lending Facility rate to 2.85%

• from 2.95%
• injected 700bn yuan with 500bn maturing
• 1 year MLF
• first cut since April of 2020

On the 7-day reverse repo today, rate cut to 2.1% from 2.2%

• 100bn yuan injected today
• 10bn yuan matured today

On Thursday this week, 20 January, we get 1 year and 5 year Loan Prime Rates set.

A cut to the MLF will be seen as an indication the LPR rates too could see a cut.

Asian stock go higher after this Bank of China Move Nikkei +1% , Topix +0,89, Kospi +0,49, Hang Seng +2,38% 

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Ayhan Kose, director of the World Bank's said "There is a pronounced slowdown underway, ... Policy support is being withdrawn and there is a multitude of risks ahead of us."

The World Bank is out with its latest economic forecasts:

• Sees developed economies growing 3.8% vs 4.0% in June forecasts
• 2021 global GDP forecast 5.5% vs 5.7% in June
• Sees 2021 Japan GDP at 1.7% vs 2.9% in June
• Sees 2022 Japan GDP at +2.9%
• China forecast of 5.1% vs 5.4% prior
• Sees 2022 US GDP +3.7% +4.2% prior
• Sees 2023 global GDP at 3.2%
• A surge in omicron that overwhelms healthcare systems could trim another 0.7 pp from growth

Stocks grow consistent  SPX +0.92 Nasdaq 1,47 after optimistic Powel discourse

• The main thing we can do is foster a strong employment market, consistent with our inflation mandate
• In order to get a long expansion, we need price stability
• We will use our tools to bring inflation back down
• There are great benefits of a tight labor market
• It is really time for us to move away from emergency settings
• Doing so should not have a negative impact on labor market
• We're not seeing the progress on supply-side issues that we thought -- that all forecasters thought
• Over time inflation will subside, but the question is how fast
• Inflation will last until the middle of this year
• Fed has not made any decisions on the timing of normalization
• This year I expect the Fed will raise rates, end asset purchases and perhaps later this year allow the balance sheet to shrink
• We're going to learn a lot about the path of inflation
• It will take 2-4 meetings to work through balance sheet decision (4th meeting is June 15)
• Expects to see some relief on supply side later this year; if not there's a risk of inflation becoming entrenched
• We believed we would see material relief on the supply side

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The ECB has a monetary policy announcement on Thursday and many investors are wondering if euro will fall as the CAD or AUD.ECB was one of the most dovish central bank because of COVID spread and low performance economy.

What we need to watch today:

• Consensus looks for a slowdown in the pace of PEPP purchases during Q4
• A decision on the future of PEPP is not expected to take place at the upcoming meeting
• Economic forecasts are set to see upgrades to 2021 growth and inflation. 2023 inflation is set to remain sub-target

Focus for PEPP will instead fall on the Q4 pace of purchases which is set to be lowered from the current "significantly higher" level of EUR 80bln/month

The press conference will likely see President Lagarde caution that any slowing in the pace of purchases for PEPP will not be regarded as a "taper" as purchases are not on track to reach zero and policymakers will vow to maintain favorable financing conditions.

Policymakers were not expecting to make a decision on the future of PEPP bond purchases in September given the persistent uncertainty posed by the pandemic but a decision in October or December was seen as more likely.

Chart below you can see nomura forecast on PEPP

What about Rates

Rates according to Lagarde will “remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term."

Ing case scenario on ECB Forecast

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BoE's Broadbent says he thinks conditions for a rate rise have been met, but need to focus on medium term

BoE's Ramsden says necessary but not sufficient condition for a rate rise have been met

BoE's Bailey says he thinks minimum conditions for a rate rise have been met, but not sufficient for one

BoE's Tenreyro says she does not think guidance conditions for a rate rise have been met

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BoE's Bailey says persistence of COVID means there has not been expected rebalancing of demand between goods and services, pushing inflation higher than expected

• Semiconductor shortage has led to shortage of new cars and pushing up second than car prices as well in UK.
• Higher than anticipated inflation underlines persistence of COVID.
• Overall economic impact of COVID in UK has attenuated.
• Seeing some short-term levelling off of recovery.
• Do not think inflation will be persistent.
• Think it is unlikely commodity prices will continue to rise.
• Expect supply bottlenecks to sort themselves out.
• Large concern is getting labour market vacancies filled.
• End of furlough scheme should help fill vaccines.
• He has a bit more concern regarding persistence of labour market pressures.
• Risks on both sides to inflation returning to target over medium term.
• Market curve does point to some increase in interest rates.

GBP Going UP 20 pips on news reaction

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The BoC leaves its Overnight Rate unchanged at 0.25% as expected, rate of QE unchanged as expected; forward guidance unchanged as expected

• The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery.
• Reiterates "The Governing Council judges that the Canadian economy still has considerable excess capacity"
• "We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective."
• "In Canada, GDP contracted by about 1 percent in the second quarter, weaker than anticipated in the Bank’s July Monetary Policy Report (MPR)."

  CAD is going in red worst performance from all currencies with -0.29% today

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Fed's Bullard (2022 voter) says Fed should proceed with tapering despite the weak US jobs data, while he dismissed concerns the rebound in the labour market was faltering and said there is plenty of demand for workers. USD strength after comments

• Note Bullard is the first Fed official to speak following Friday's NFPs.
• Headline nonfarm payrolls disappointed expectations in August, printing 235k (exp. 750k); the unemployment rate fell by 0.2ppts, in line with the consensus, to 5.2%. Other measures of slack improved in the month, with the U6 rate of underemployment falling to 8.8% from 9.2%, the employment-population ratio, which is a metric that is closely watched Fed officials, rose to 58.5% from 58.4% (vs pre-pandemic 61.1%), although the participation rate, which the Fed also factors into its deliberations, was unchanged at 61.7%. The wages data saw average hourly earnings rising +0.6% M/M (exp. +0.3%), lifting the annual rate to 4.3% (from 4.1%); average workweek hours declined a little to 34.7hrs from 34.8hrs. Analysts noted that the lower than consensus headline was hinted at by several proxies, including the Homebase Survey, the ISM survey data (only manufacturing was available ahead of the NFP report), as well as the Conference Board's gauge of consumer confidence, which all gave the impression that Delta fears were contributing to labour market tightness. Ahead, Pantheon Macroeconomics is expecting further weakness in the September data too, and is also flagging concerns over the prospects of an October revival, given that labour market behaviour lags cases, and PM says cases are yet to peak. "Before Delta, we were looking for 1M-plus payroll gains in the fall, but that’s now going to be a real struggle, suggesting that Chair Powell will be in no hurry to be pushed into tapering while the labor market picture so uncertain," Pantheon writes, "we think the announcement comes in December, but the FOMC could easily be forced to wait until January." Meanwhile, many have been looking for evidence that the inflation upside in recent months was more persistent than the Fed was acknowledging, and were looking for this evidence within the wages metrics (the idea is that Americans would begin to demand higher compensation amid rising price pressures, which could feed into a loop of inflation becoming more persistent). While this month's data may allude to that theme, Pantheon warns that while the +0.6% M/M jump is startling, "it overstates the trend because the data are not mix-adjusted, so a month with no net job gains in the low-paid leisure and hospitality sector will see a bigger increase in AHE than a month with more even payroll growth." Even so, the consultancy notes that wage gains have averaged +5.8% Y/Y in the three-months to August vs the previous three months, and while it is high, PM argues that "this ignores the idea the faster productivity growth potentially raises the Fed’s tolerance for faster wage growth; ultimately, what matters is unit labour costs, which remain contained."

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• The Board's decision to extend the bond purchases at $4 billion a week until at least February 2022 reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak.
• This setback to the economic expansion is expected to be only temporary. The Delta outbreak is expected to delay, but not derail, the recovery.
• The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.
• This bounce-back and it is likely to be slower than that earlier in the year.

Note, one of the major newswires reported the QE decision as a "hold", although the official RBA release states "purchase government securities at the rate of $4 billion a week and to continue the purchases at this rate until at least mid February 2022."

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ECB's Villeroy says that France and the EZ should be back to pre-COVID levels in early 2022 or maybe before this

• No risk of higher inflation at this stage
• PEPP will remain until at least March 2022; not urgent to decide on it at the September gathering
• Financing conditions have improved since June

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Fed Vice Chair Clarida (voter) stated there has been clear progress on the labour market which is in agreement with Fed Chair Powell and he would support a taper if the labour market gains continue as expected, while he added that we will get a better read on the labour market this fall. (Newswires)

Fed's Waller (voter) said we have definitely made progress on inflation and that one more good jobs report will be sufficient to be able to start tapering. Waller added that he would like to start to taper early this fall and does not see a reason to wait, while he definitely would like to see MBS taped faster and would like to finish taper by mid-2022 to have the space to raise rates if required. (Newswires)

Fed's Mester (2022, 2024 voter) reiterated the Fed has basically met the criteria for tapering asset purchases and believes the Fed should use the September meeting to lay out thinking about the pace and timing of tapering and looks to end taper by mid-2022. Mester also noted that whether they start tapering in November or December, it is not going to make a material difference for the economy and reiterated that even if there is some pullback, she thinks the economy will remain strong. (Newswires)

Fed's Bullard (2022 voter) said he favours tapering treasuries by USD 20bln a month and MBS by USD 10bln a month. (Newswires)

White House forecasts budget deficit to reduce by USD 684bln in the next decade, while there were separate comments from White House Economic Adviser Bernstein that they need to keep pushing a robust recovery in the US. (Newswires)

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